ShoreTel Reports Financial Results for Second Quarter Fiscal Year 2014

SUNNYVALE, Calif., Jan. 23, 2014 /PRNewswire/ -- ShoreTel® (NASDAQ: SHOR), the leading provider of brilliantly simple phone systems and unified communications solutions, today announced financial results for the second quarter of its fiscal year 2014, which ended December 31, 2013.

For the second quarter of fiscal 2014, total revenue was $84.5 million, an increase of 13 percent compared to the second quarter of fiscal 2013. Non-GAAP net income, which excludes stock-based compensation charges, amortization of acquisition-related intangibles, other charges and related tax adjustments, for the second quarter of fiscal year 2014, was $3.2 million, or $0.05 per share. This compares with a non-GAAP net loss of $2.6 million, or $0.04 per share, in the second quarter of fiscal 2013. GAAP net loss was $0.9 million, or $0.02 per share, in the second quarter of fiscal 2014, compared with a GAAP net loss of $10.4 million, or $0.18 per share, in the second quarter of fiscal 2013.

"The positive second quarter results validate the ongoing value of our business model which led to our revenue growth, non-GAAP profitability and significant cash flow from operations," said Don Joos, president and CEO of ShoreTel. "We have strategically positioned the company for the growth opportunities in our industry and we remain focused on executing key initiatives including our enhanced channel partner program, sales team integration and product launches."

Second Quarter of Fiscal 2014 Financial Highlights

Recurring revenue, which consists of cloud monthly recurring revenue and premise support revenues, reached an annualized value of $126 million; an increase of 20 percent compared to the second quarter of fiscal 2013, and represented 37 percent of total revenues in the second quarter of fiscal 2014.

Non-GAAP gross margin, which excludes stock-based compensation charges, amortization of acquisition-related intangibles and other charges, for the second quarter of fiscal year 2014, was 60.7 percent, compared with 61.8 percent in the year-ago period. GAAP gross margin for the second quarter of fiscal year 2014 was 59.0 percent, compared with 58.8 percent in the second quarter of fiscal year 2013.

In the second quarter of fiscal 2014 the company generated free cash flow of $7.3 million consisting of $13.5 million in cash flow from operations less $6.2 million of capital expenditures. The company reduced its debt obligations down to $9 million and had $57.3 million in cash, cash equivalents and short-term investments as of December 31, 2013.

Line of Business Results

ShoreTel Sky

ShoreTel Sky hosted revenues of $21.7 million were up 27 percent year-over-year and 5 percent sequentially. Non-GAAP gross margins on hosted revenue were 39.8 percent in the second quarter of fiscal 2014, compared with 43.3 percent in the second quarter of fiscal 2013. The total number of installed customer seats increased 40 percent over the second quarter of fiscal 2013 to approximately 136,000. Annualized revenue churn remained slightly below 4 percent.

Premise Business

Premise revenues of $62.8 million were up 9 percent year-over-year and down 1 percent sequentially. Product revenues growth accelerated to 6 percent year-over-year and Support and Services revenues grew 18 percent year-over-year. Non-GAAP gross margins in the premise business were 67.9 percent in the second quarter of fiscal 2014, compared with 67.3 percent in the second quarter of fiscal 2013.

Selected Operational Metrics

Quarter Ended

Quarter Ended

Quarter Ended

Quarter Ended

Quarter Ended

12/31/13

09/30/13

06/30/13

03/31/13

12/31/12

Annual recurring revenue run rate (in millions)

$ 125.6

$ 121.1

$ 114.7

$ 108.3

$ 104.9

Cloud Monthly Average Revenue Per User (ARPU)

$ 45

$ 47

$ 49

$ 50

$ 53

Cloud Average # of Seats per Customer

44

43

44

43

41

Cloud Average Monthly Recurring Revenue Per Customer

$ 1,982

$ 2,040

$ 2,123

$ 2,131

$ 2,162

Cloud Monthly Revenue Churn Rate

0.3%

0.3%

0.3%

0.3%

0.3%

Total Company Headcount

925

932

965

957

965

Non-GAAP Gross Margin-Premise

67.9%

68.5%

67.8%

68.3%

67.3%

Non-GAAP Gross Margin-Hosted

39.8%

43.4%

39.1%

41.7%

43.3%

Business Highlights

ShoreTel Launches Enhancements to its Channel Partner Program

In January ShoreTel launched its enhancements to its channel partner program. Under the program many of ShoreTel's existing channel partners and new cloud partners complete product education and sales training related to ShoreTel's Sky products to prepare them to identify opportunities and sell ShoreTel's cloud solutions. Many partners also make commitments to achieve certain sales targets under agreed upon compensation plans.

The program is leveraging ShoreTel's experience with its mature channel partner network to attract customers that are larger and have more complex unified communications needs.

ShoreTel Integrates its Cloud and Premise Sales Teams

In January ShoreTel integrated its cloud and premise sales teams. In addition, certain members of the sales team now carry a cloud sales quota which is incremental to their premise quota. The increased coordination of the sales team and ShoreTel's channel partners further improves ShoreTel's ability to solve the unified communications needs of the company's total addressable market.

ShoreTel Appoints Mark Roberts as Chief Marketing Officer

In December, ShoreTel appointed Mark Roberts to be its new chief marketing officer. Roberts has more than 20 years of technology marketing experience and brings strong technology, channel and unified communications expertise to ShoreTel. As such, Roberts' background is complementary to ShoreTel's strategic direction and growth initiatives, and he will play an instrumental role in executing the company's plans. As ShoreTel's CMO, Roberts will lead the overall marketing strategy, product marketing, demand generation, branding and external communications.

ShoreTel Continues to Demonstrate its Industry Leadership and World Class Customer Service

ShoreTel's focus on its customers' primary needs was recognized by Frost & Sullivan, which named ShoreTel as North America's "Company of the Year for Unified Communications and Collaboration". The report cites ShoreTel's ability to help its customers improve productivity and accelerate business processes as catalysts for long-term and sustainable growth.

ShoreTel's analytic research indicates that our customers who have received the best customer experience spend at twice the level as other customers. For the six months ending December 31, 2013, ShoreTel once again earned a Net Promoter Score above the world class threshold.

Business Outlook

ShoreTel is providing the following outlook for its fiscal third quarter of 2014 ending March 31, 2014:

Revenue is expected to be in the range of $80 million to $85 million.

GAAP gross margin is expected to be in the range of 59 percent to 60 percent. Non-GAAP gross margin, which excludes approximately $1.4 million in stock-based compensation charges, amortization of acquisition-related intangibles and other charges, is expected to be in the range of 61 percent to 62 percent.

GAAP operating expenses are expected to be in the range of $50.5 million to $51.5 million. Non-GAAP operating expenses, which excludes approximately $2.5 million in stock-based compensation charges, amortization of acquisition-related intangibles and other charges are expected to be in the range of $48 million to $49 million.

Conference Call Information

The Company will host a corresponding conference call and live webcast at 2:00 p.m. Pacific Time on Thursday, January 23, 2014. To access the conference call, dial +1-877-317-6789 for callers in the U.S. or + 1-412-317-6789 for international callers and provide the operator with the conference identification number of 10039017.

A live webcast will be available in the Investor Relations section of the Company's corporate website at http://ir.shoretel.com/ and an archived recording will be available beginning approximately two hours after the completion of the call. An audio telephonic replay of the conference call will also be available beginning approximately one hour after the completion of the call until January 31, 2014 by dialing +1-877-344-7529 for callers in the U.S. or +1-412-317-0088 for callers outside the U.S. and providing the conference identification number of 10039017.

Use of Non-GAAP Financial Measures

ShoreTel reports all required financial information in accordance with generally accepted accounting principles in the United States ("GAAP"), but it believes that evaluating its ongoing operating results may be difficult to understand if limited to reviewing only GAAP financial measures. Many investors have requested that ShoreTel disclose this non-GAAP information because it is useful in understanding the company's performance as it excludes non-cash charges, other non-recurring adjustments and related tax adjustments, that many investors feel may obscure the company's true operating performance. Likewise, management uses these non-GAAP measures to manage and assess the profitability of its business and does not consider stock-based compensation charges and amortization charges related to acquisition-related intangible assets and the related tax adjustments, which are non-cash charges, or other non-recurring items in managing its core operations. ShoreTel has provided a reconciliation of non-GAAP financial measures following the text of this press release. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure.

Legal Notice Regarding Forward-Looking Statements

ShoreTel assumes no obligation to update the forward-looking statements included in this release. This release contains forward-looking statements within the meaning of the "safe harbor" provisions of the federal securities laws, including, without limitation, statements by Don Joos, statements regarding future growth and statements in the "Business Outlook" section regarding ShoreTel's anticipated future revenues, gross margins, operating expenses and other financial information. The forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. The risks and uncertainties include the intense competition in our industry, our reliance on third parties to sell and support our products, our ability to continue to grow our ShoreTel Sky business, market acceptance of cloud-based products, our ability to maintain our premise business in a profitable manner, supply and manufacturing risks, our ability to control costs as we expand our business, our ability to attract, retain and ramp new sales personnel, potentially longer sales cycles, uncertainties inherent in the product development cycle, uncertainty as to market acceptance of new products and services, the potential for litigation in our industry, the uncertain impact of global economic conditions, including impact on customers' purchasing decisions, and other risk factors set forth in ShoreTel's Form 10-K for the year ended June 30, 2013, and in its Form 10-Q for the quarter ended September 30, 2013.

ShoreTel, Inc. (NASDAQ: SHOR) is a leading provider of brilliantly simple IP phone systems and unified communications solutions. Its award-winning on-premises IP-PBX solution and cloud-based hosted phone system eliminate complexity and improve productivity. Recognized for its industry-leading customer experience and support, ShoreTel's innovative business phones, application integration, collaboration tools, mobility, and contact center applications enable users to communicate and collaborate no matter the time, place or device, with minimal demand on IT resources. ShoreTel is headquartered in Sunnyvale, Calif., and has regional offices and partners worldwide. For more information, visit www.shoretel.com.

ShoreTel, ShoreTel Sky and the ShoreTel logo are trademarks or registered trademarks of ShoreTel, Inc. in the United States and/or other countries. All other trademarks, trade names and service marks herein are the property of their respective owners.

(Tables follow)

SHORETEL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

(Unaudited)

As of

As of

December 31,

June 30,

2013

2013

ASSETS

Current assets:

Cash and cash equivalents

$ 52,226

$ 43,775

Short-term investments

5,080

7,501

Accounts receivable - net

30,838

37,118

Inventories

19,282

18,891

Indemnification asset

6,151

6,277

Prepaid expenses and other current assets

5,897

6,417

Total current assets

119,474

119,979

Property and equipment - net

19,333

15,625

Goodwill

122,750

122,750

Intangible assets

33,069

38,138

Other assets

3,088

3,295

Total assets

$ 297,714

$ 299,787

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable

$ 14,337

$ 9,790

Accrued liabilities and other

15,161

17,766

Accrued employee compensation

15,321

13,159

Accrued taxes and surcharges

11,100

11,312

Purchase consideration

3,684

3,577

Deferred revenue

43,889

39,692

Total current liabilities

103,492

95,296

Line of credit - net

9,048

29,004

Long-term deferred revenue

16,790

15,294

Other long-term liabilities

3,693

4,053

Total liabilities

133,023

143,647

Stockholders' equity:

Common stock

332,784

322,258

Accumulated deficit

(168,093)

(166,118)

Total stockholders' equity

164,691

156,140

Total liabilities and stockholders' equity

$ 297,714

$ 299,787

SHORETEL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

December 31,

December 31,

2013

2012

2013

2012

Revenue:

Product

$46,557

$ 43,769

$94,239

$ 89,603

Hosted and related services

21,719

17,087

42,458

32,749

Support and services

16,209

13,780

32,075

27,268

Total revenue

84,485

74,636

168,772

149,620

Cost of revenue:

Product

16,341

15,069

32,637

30,856

Hosted and related services

14,078

11,400

26,611

20,542

Support and services

4,207

4,279

8,489

8,468

Total cost of revenue

34,626

30,748

67,737

59,866

Gross profit

49,859

43,888

101,035

89,754

Gross profit %

59.0%

58.8%

59.9%

60.0%

Operating expenses:

Research and development

12,281

12,195

25,561

26,148

Sales and marketing

27,355

31,739

55,021

62,495

General and administrative

10,398

9,292

21,027

17,887

Total operating expenses

50,034

53,226

101,609

106,530

Loss from operations

(175)

(9,338)

(574)

(16,776)

Other income (expense), net

(539)

(926)

(966)

(1,328)

Loss before provision for income tax

(714)

(10,264)

(1,540)

(18,104)

Provision for income tax

226

90

435

287

Net loss

$ (940)

$(10,354)

$ (1,975)

$(18,391)

Net loss per share:

Basic and diluted

$ (0.02)

$ (0.18)

$ (0.03)

$ (0.32)

Shares used in computing net loss per share:

Basic and diluted

60,809

58,566

60,177

58,376

SHORETEL, INC.

GAAP TO NON-GAAP RECONCILIATION

(Amounts in thousands, except per share amounts)

(Unaudited)

Three Months Ended

Six Months Ended

December 31,

December 31,

2013

2012

2013

2012

GAAP Premise gross profit

$ 42,218

$ 38,201

$ 85,188

$ 77,547

Share-based compensation expense

142

(a)

273

(a)

418

(a)

530

(a)

Amortization of acquisition-related intangibles

268

(b)

260

(b)

537

(b)

520

(b)

Severance and other

-

(c)

-

(c)

-

(c)

2

(c)

Non-GAAP Premise gross profit

$ 42,628

$ 38,734

$ 86,143

$ 78,599

Non-GAAP Premise gross margin

67.9%

67.3%

68.2%

67.3%

GAAP Hosted gross profit

$ 7,641

$ 5,687

$ 15,847

$ 12,207

Share-based compensation expense

183

(a)

40

(a)

232

(a)

78

(a)

Amortization of acquisition-related intangibles

817

(b)

749

(b)

1,566

(b)

1,498

(b)

Severance and other

-

(c)

-

(c)

-

(c)

8

(c)

Prior quarter charge for change in estimate of sales, use and telecommunications tax

-

(g)

927

(g)

-

(g)

927

(g)

Non-GAAP Hosted gross profit

$ 8,641

$ 7,403

$ 17,645

$ 14,718

Non-GAAP Hosted gross margin

39.8%

43.3%

41.6%

44.9%

GAAP total gross profit

$ 49,859

$ 43,888

$ 101,035

$ 89,754

Share-based compensation expense

325

(a)

313

(a)

650

(a)

608

(a)

Amortization of acquisition-related intangibles

1,085

(b)

1,009

(b)

2,103

(b)

2,018

(b)

Severance and other

-

(c)

-

(c)

-

(c)

10

(c)

Prior quarter charge for change in estimate of sales, use and telecommunications tax

-

(g)

927

(g)

-

(g)

927

(g)

Non-GAAP total gross profit

$ 51,269

$ 46,137

$ 103,788

$ 93,317

Non-GAAP total gross margin

60.7%

61.8%

61.5%

62.4%

GAAP loss from operations

$ (175)

$ (9,338)

$ (574)

$ (16,776)

Share-based compensation expense

2,083

(a)

3,499

(a)

4,197

(a)

6,852

(a)

Amortization of acquisition-related intangibles

1,974

(b)

1,898

(b)

3,881

(b)

3,796

(b)

Severance and Other

-

(c)

-

(c)

1,019

(c)

382

(c)

Prior quarter charge for change in estimate of sales, use and telecommunications tax

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